Is a Volatile Market an Opportunity for Tax Loss Harvesting?

Volatile markets are challenging to endure as investors. We feel that acutely during times of uncertainty, no matter our years of experience or our understanding of investment portfolios. During times of stress, it’s helpful to look at what we can control. In the context of investing, this can also reveal opportunities.

Depressed market valuations offer creative investors opportunities to capitalize. For those finding themselves in a low-income, low-tax environment with retirement assets invested in equities, a Roth conversion may be in order. For investors with taxable investment accounts, there is another strategy to consider carefully: tax loss harvesting.

Tax loss harvesting opportunity

Tax loss harvesting involves selling out of positions and trading at losses while buying similar investment strategies to maintain comparable asset-class exposure. The losses you “book” through harvesting can benefit you in several ways:

• They can offset capital gains already realized during the year.
• They can offset future capital gains that may occur later in the year.
• If your losses exceed your gains, you can deduct up to $3,000 against ordinary income annually.
• Any unused losses beyond that $3,000 threshold roll forward indefinitely and can be applied in future years.

So, when should you consider harvesting a loss? Should it be based on a specific dollar amount or a percentage drop in value? The answer isn’t one-size-fits-all — it depends on a few key factors.

You’ll want to weigh the size of the loss against the cost of executing the trades and the actual tax savings. For example, a $1,800 loss taxed at 15% generates a $270 potential benefit. If your total trading costs (buys and sells) are $40, your net gain is only $230 — not insignificant, but maybe not worth the hassle. Now, scale that up to an $18,000 loss, and the potential tax benefit jumps to $2,700. That might be more compelling.

It’s also important to think through the second half of the strategy: what are you buying after the sale? Do you have an appropriate alternative investment lined up? Is it something you’d be comfortable holding long-term? If not, you could find yourself with unwanted risk or a mismatch in your portfolio.

Having suitable substitute investments also gives you more flexibility. If the market drops further, you might choose to harvest at a relatively modest 5–10% decline and harvest again. The key is having enough viable alternatives so you’re not left without a place to reinvest.

Setting a dollar threshold for loss harvesting ensures the tax impact is meaningful on your return. Meanwhile, setting a percentage threshold ensures the decline is significant enough relative to the normal volatility of the asset class. Ideally, you use both together to guide your decision — focusing on real tax savings, not just paper losses.

Your tax situation

Your personal tax situation plays a role in tax loss harvesting. Did you realize gains earlier this year that you are trying to offset? Or do you have a concentrated position with significant embedded capital gains, like in your company’s stock? If so, you might take a more aggressive stance than an investor simply trying to take advantage of undefined tax mitigation in the future.

As with most things, brilliant execution significantly affects successful outcomes. In volatile markets, you must diligently calculate appropriate buys for your replacement funds with large intra-day pricing swings. You don’t want to cancel a trade due to insufficient funds or incurring margin interest.

Beware of losing the benefit of trading too frequently. The wash-sale rule was designed to discourage investors from selling securities at a loss to claim a tax benefit. A wash sale occurs when you sell a security at a loss and then purchase that same security or “substantially identical” securities within 30 days before or after the sale. This might mean buying back the same fund or the same fund in a different share class.

Tax loss harvesting as part of a larger plan

Tax strategies are rarely one-size-fits-all. Every situation is different, and your benefits of harvesting losses vary based on your income, account types, and overall financial goals. As with any investment strategy, thorough research is key to capturing the intended benefits without unintentionally increasing your risk. Partnering with a Personal CFO can give you the confidence that every angle is considered, every option explored, and every decision executed with precision. Are you curious how a Personal CFO can help you maximize your portfolio? We’d love to connect.

This content is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.